POTENTIAL RISKS to the economy which were set out in the Budget in December are now materialising, the Department of Finance told the social partners yesterday.
In a presentation to the national pay talks, the department said that the short-term economic prospects for this year and 2009 were “challenging”.
But it said that if there was an appropriate response now, the prospects were more benign from 2010.
The department said potential risks to the economy which were flagged in the Budget in December, such as an economic slowdown in the US, an appreciation of exchange rates, higher oil prices, further financial market difficulties and lower-than assumed house-building, had come to pass.
It said the ability of the economy to recover would depend on the responses.
There was a need to restore competitiveness, improve productivity, invest in infrastructure and recognise the international context of the economic difficulties. “Maintaining sustainable public finances will be essential,” it stated.
In a projected economic outlook for the next few years, the department said the growth rate in 2009 would remain “modest” and that unemployment would be in the range of 5.5 to 6 per cent.
It forecast that inflation would ease in the years ahead but also described the starting position of the public finances for this year’s budget as “more difficult”.
It said the challenges in the short term were to manage the slowdown, to stabilise the deterioration in the public finances and to regain competitiveness.
In the medium term, it said the challenges were to invest in infrastructure, match changes in current spending to growth in resources and to deal with growing competition from emerging economies. In the longer term the challenge was the ageing of the population, and this needed consideration now.
It said the external economic environment was now the weakest it had been for some time.
The department said there had been a slowdown experienced in the State’s major trading partners while the euro was close to its highest ever level against the dollar and sterling. It said difficulties in the international financial markets were “intensifying” while commodity prices had hit historically high levels.
It added that domestic demand was also “slowing rapidly” and also warned that a tightening of lending may “compound the slowdown” in the construction sector.
The department also maintained that the €600 million shortfall in tax revenue in the first quarter – of which more than half was in capital gains tax – was “unlikely to be recouped”. It also said that other tax headings were also “potentially under pressure”.